Stocks Can't Shake Their Funk

Some highfliers of the stock market descended into official correction territory, drilling home a sudden turn in investor sentiment that has occurred in the span of just a few weeks.

The technology-oriented Nasdaq Composite Index and the small-stock-focused Russell 2000 index tumbled on Wednesday and are now down by more than 10% since recent highs hit in mid-September. Such a decline is commonly considered a "correction" by market observers. A decline of 20% is a bear market.

Both the Nasdaq and the Russell had soared in the early part of the year as investors became emboldened to buy riskier assets. Much of that was driven by the belief that the Federal Reserve would underpin stock prices with a new round of bond buying. That helped the Dow Jones Industrial Average and Standard & Poor's 500-stock index rise, too.

Stocks dropped to a fresh three-month low as growing political concerns in the U.S. and European economic weakness pushed the technology-heavy Nasdaq Composite into a correction. Matt Jarzemsky has details on The News Hub. Photo: Reuters.

But ever since the Fed made good on its promise, stocks have been in a funk. Investors turned their attention to last week's election and subsequent worries about political gridlock in Washington. Moreover, flare-ups in Europe's debt crisis also have made investors wary. In China, where a leadership transition is under way, the economy still is in danger of slowing down.

"Sentiment has clearly turned in the face of some pretty substantial headwinds," said Beata Kirr, senior portfolio manager for Bernstein Global Wealth Management in Chicago.

The stock market's 200-day moving average has now been decisively broken. But should you sell? Mark Hulbert joins Markets Hub to discuss. Photo: Reuters.

The outlook has prompted some investors, many of whom have made reasonable gains this year, to sell, Ms. Kirr said. Also, investors are eyeing potential tax increases that likely will take effect, even if an agreement is reached by Congress on taxes and spending, such as levies on capital gains and dividends.

That view has been weighing particularly on big gainers such as technology stocks and shares of smaller companies, which are considered riskier than their large-cap peers.

On Wednesday, the Nasdaq Composite fell 37.08 points, or 1.3%, to 2846.81, its lowest closing level since June 25. As recently as mid-September, the Nasdaq was up 22% on the year and trading at 12-year highs. Since hitting a 52-week high on Sept. 14, it has tumbled 11%, including a 5.5% slide since the election on Nov. 6.

ENLARGE

Much of the move in the Nasdaq can be attributed to one stock: Apple. The Cupertino, Calif., company has fallen 24% in less than two months, amid some disappointment in its new products, after soaring as much as 73% this year. On Wednesday, Apple fell $6.02, or 1.1%, to $536.88, though it still is up 33% this year.

The Russell 2000 index dropped 15.81 points, or 2%, to 773.20. It is now down 11% from a recent high hit Sept. 14, including a 6.4% slide since the election.

The Dow Jones Industrial Average lost 185.23 points, or 1.5%, to 12570.95, its lowest level since June 26. The blue-chip measure has fallen in five of the six trading sessions since Election Day, shedding 5.1% in that time frame. "The market is starting to absorb the fact that we're near the end of the year and we still have no fiscal policy in the U.S.," said Gina Martin Adams, equity strategist for Wells Fargo Securities in New York. "Nobody knows what's going to happen before the end of the year."

On Tuesday and Wednesday, the partisan battles that many investors expect to dominate Washington in coming weeks came into sharper focus. Both Democrats and Republicans have until the end of the year to agree on a plan to reduce the deficit before Bush-era tax cuts expire and automatic spending cuts take effect, an event economists say would likely lead to a recession.

Late Tuesday, President Barack Obama said he would seek $1.6 trillion in new tax revenue, far more than Republicans are likely to accept and twice as much as the sum discussed with GOP leaders last year. At a news conference Wednesday, the president underscored his position, which some market watchers feared could make for a more contentious environment with congressional Republicans.

"At every turn, Obama is going after a very aggressive line, and that has alarmed a lot of people," said Michael Shea, managing partner at Direct Access Partners, an institutional brokerage firm. "The president clearly did not start the negotiations near the middle, he started them way out on one side, and you know the Republicans will have to come up with an equally far-out number."

That turned an already-negative day into a selloff on Wednesday.

Adding to the raft of geopolitical concerns, the Middle East also caught investors' attention after Hamas officials in the Gaza Strip said an Israeli airstrike killed the commander of its military wing. The news helped Crude-oil prices reversed losses, settling up 94 cents, or 1.1%, to $86.32 a barrel.

A strong earnings report from Cisco SystemsCSCO0.42% helped it become the only Dow component to finish with a gain. The network-equipment maker climbed 4.8% after its quarterly earnings and revenue exceeded analysts' expectations, helped by strength in its services business. Rival Juniper NetworksJNPR1.65% benefited from Cisco's strong earnings, rising 1.2%.

However, Cisco's strong rise did little to help the price-weighted Dow, given the stock's low weighting on the blue-chip measure. The Cisco-related boost was more than offset by a decline at International Business Machines,IBM0.64% which lost 1.5%.

"The election was so front and center," said Ms. Kirr of Bernstein. "The election provided only one element of uncertainty, and there's still lots of it…What people have lost sight of is that it was a tough earnings season, and that the global weakness was hitting top-line revenues and margins."

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